Feb. 16 (Bloomberg) -- Three former executives at Olympus
Corp., including ex-chairman Tsuyoshi Kikukawa, and four others
were arrested for suspected violation of Japan’s Financial
Instruments and Exchange Act.

The camera maker is facing shareholder lawsuits and may be
subject to further criminal investigation after admitting to a
13-year cover-up. The company restated past securities reports
and took a $1.3 billion reduction in net assets in December.

Olympus’s Tokyo headquarters and its affiliated offices
were raided in December by prosecutors after the company said
Kikukawa and two others colluded to hide investment losses from
the 1990s. The stock has plunged 49 percent since the Oct. 14
dismissal of its first non-Japanese president, Michael Woodford,
who later publicly questioned inflated takeover costs.

Kikukawa, 70, who headed Olympus for 10 years until last
year, Hideo Yamada, 67, who led the investment unit since the
1980s and later became an auditing officer, and former Executive
Vice President Hisashi Mori concealed losses, booked overstated
goodwill and falsified financial statements, the prosecutors
said in a statement.

The prosecutors also arrested Akio Nakagawa, cited in a
December panel report as having aided Olympus in structuring its
loss-hiding schemes. Nobumasa Yokoo, who was also named in the
report, Taku Hada and Hiroshi Ono, were arrested by the Tokyo
Metropolitan Police, according to the statement.

“We take the situation seriously,” Yoshiaki Yamada, a
spokesman for Olympus, said by phone today. “We will cooperate
fully with investigators.”

Investment Losses

“It may take time for Olympus to regain its reputation,”
said Yoshihiro Ito, chief strategist at Okasan Online Securities
Co. in Tokyo. “The company is trying to show it’s making an
effort to rebuild its management and balance sheet.”

Founded in 1919 as a microscope and thermometer business,
Olympus produced its first camera in 1936 and a predecessor to
the modern-day endoscope in 1950, according to its website.
Olympus now controls 75 percent of the global market for
endoscopes, instruments doctors use to look inside the body
cavity to help detect disease.

In 1987, President Toshiro Shimoyama announced a strategy
to strengthen the company’s investments after operating profit
fell by half due to the yen’s gain, according to a panel report
disclosed in December. Investment losses began to swell after
the Japanese stock market crashed in 1989 and reached about 100
billion yen ($1.3 billion) in 1998, when Yamada and Mori
resorted to financial trickery to hide them, the report said.

Former bankers

The company inflated takeover costs of London-listed Gyrus
Group Plc and three Japanese companies with the intention of
boosting goodwill, according to the Dec. 6 panel report. Yamada
and Mori planned to write down the goodwill over years to cancel
out losses that were kept off Olympus’s balance sheet.

At a press conference in London this morning, former
president Woodford said, while the arrests were encouraging,
“there are still many important issues which are not covered by
today’s announcement.” He called for further investigation into
the role of banks and accounting firms in the fraud, and said
three directors at the company -- Masataka Suzuki, Kazuhiro
Watanabe and Shinichi Nishigaki -- should be replaced.

Nakagawa, 61, helped to create paper companies which bought
impaired assets from Olympus, while Yokoo, 57, who ran a Tokyo-based consulting firm Global Company where Hada and Ono worked,
helped Olympus set overseas bank accounts to provide funds to
such paper companies, according to the panel report. Yokoo’s
venture fund was used by Olympus to inflate costs of
acquisitions of three Japanese companies, the report said.

Merrill, Drexel

Nakagawa, who’s based in Hong Kong, worked at Merrill
Lynch, Pierce, Fenner & Smith, Shearson Lehman Hutton Inc.,
Drexel Burnham Lambert Inc. and PaineWebber Inc. from the 1970s
to the 1990s, according to Financial Industry Regulatory
Authority records in the U.S. He started a boutique brokerage
firm Axes (Japan) Securities Co. in 1998.

Olympus fell 2.4 percent to close at 1,273 yen in Tokyo
trading. The stock is up 26 percent this year, compared with a 9
percent gain by Japan’s benchmark Nikkei 225 Stock Average.

Olympus’s case “is getting more attention from foreign
media than Japanese,” Toshiyuki Shiga, chief operating officer
of Nissan Motor Co., said at a conference today. “Looking at
their articles make me concerned that it would lead to a view
that Japanese corporate governance overall is weak.”

Executives, Auditors

Olympus sued 19 current and former executives, including
current President Shuichi Takayama and five corporate auditors,
in January over their roles in concealing losses. The company
formed panels to reform management and nominate a new board.

The company plans to hold an emergency shareholder meeting
on April 20 at which investors will vote on new management.

The company is seeking as much as 3.6 billion yen in
damages from executives, including Kikukawa, and a combined 1
billion yen in damages from corporate auditors.

The Tokyo exchange last month allowed Olympus to keep its
stock market listing after fining the company 10 million yen and
telling it to report on efforts to improve management.

Kikukawa, born in 1941 in Japan’s southwestern Shikoku
island, joined Olympus in 1964 after working for a trading
company. Under Kikukawa’s leadership from 2001, Olympus’s
revenue jumped 82 percent to 847 billion yen, while operating
profit remained almost unchanged at about 35 billion yen.

He oversaw about $4.3 billion in 31 acquisitions of
companies, including Gyrus, according to data compiled by
Bloomberg.

Olympus earlier this week predicted an annual loss of 32
billion yen for the year ending in March as it wrote off
equipment damaged by Thailand’s record floods. The accounting
fraud hasn’t had a major impact on its business, Takayama said.

The company is considering ways to boost capital including
alliances, he said.